For many years now, I have used options to leverage, hedge or generate additional income from an equity investment. Until recently, I was not a 'day' trader of options using the technicals, common sense and some fairly elevated option trading knowledge. The illustration I am about to discuss is REAL - I know this for a fact as I did the trades. Yet, I still cannot believe that these circumstances and opportunities can exist, but unfortunately I cannot offer a sensible, technical or fundamental explanation for these circumstances. I can make some conjecture, but this one defies logic.
With that said, let me provide the details. On October 19, I was tracking and looking at many different stocks to include Edwards Lifesciences (NYSE:EW) because of my options in Intuitive Surgical and some other healthcare related stocks. The premium was approximately $.50 with EW at $86 or so but there was too much time left in the day for me to take the risk on a naked Put. About one hour prior to the close and the October expiration of option contracts, I happened to see EW treading water around $86.50 to $87 and the bid on the $85 Puts was $.35. I decided to sell the October 85 Puts because I felt that the premium was rather high for these out-of-the-money Puts in addition to the fact that the stock never broke below $85 that day.
For the next hour, I watched EW and noticed the premium increasing on the October Puts and doubled my position selling additional contracts for $1.00. The stock was rather volatile and the option pricing was even more erratic. Yes, I became somewhat tentative when EW approached $85.20 at some points during the next 30 minutes and I even attempted to sell more contracts at $1.50 because of the widening spread and Ask prices above $2.00. Had I sat and watched this every minute for the last 60 minutes of the session, I may have even been paid the $1.50 when EW was $85.20 if the order was placed at the right time. So far, so good, but it got even better.
At 1358 hours, with two minutes left, EW was solidly above $86 - over $1 out of the money - and the Bid on these same contracts was $.40. Keep in mind that I was paid only $.35 an hour prior with EW slightly higher in price. I kept asking myself, why would anyone pay $.40 for the 85 Puts which were about to expire worthless in less than two minutes. I stared at my screen for 120 seconds with another order to sell more Puts at $.75 which was the best Asking price. I kept second-guessing myself - is it possible that some institutional investor is about to sell a boat-load of shares on the close to push the price below $85. I ran through all of the possibilities and potential outcomes for those two minutes with EW gyrating around $86.25, but I failed to change my order to the Bid which remained at $.40 until 1600 hrs.
I was mentally paralyzed and did not change my order, even with 15 seconds left and two orders remaining at $.40 Bid. After the close I felt rather stupid and wanted to kick myself for failing to obtain the 'Money for Nothing', per the rock band, Dire Straits - but the 'Chicks for Free' were not part of the equation. How could I possibly be so obtuse and not pounce on this incredible and extremely rare opportunity? Although I probably would not have obtained more than 10 contracts even though 760 contracts traded on October 19, I will take $400 for 15 seconds of work with no risk on any day and at any time. Of course in hindsight which is always 20/20, I should have backed up the truck and leveraged as many naked Puts as my margin account would allow.
The frustration that I felt at that moment, and I can only assume that many of the readers of this article have also undergone this as one time or another, is hard to describe. I, as well as other contributors, investors and traders, work so hard to research and dissect possible winning option strategies for 25% to %100 returns. For example, the analysis that I conducted on Intuitive Surgical (NASDAQ:ISRG) and the trades that I completed with calendar spreads, covered calls, etc. over a period of several weeks yielded less profit at the close on October 19 than the EW Puts did in one hour. As it is always said, life isn't fair.
At first, I was reluctant to write this piece, but I do so not only to disclose, share and educate, but also to inquire and ask those with the knowledge and experience for some plausible explanation. I cannot come up with one that makes sense. Was this an anomaly or should I be actively searching for more of these situations on the day of option expiration? What can anyone offer to explain or justify this situation? I truly want comments on this topic and look forward to any and all that you may offer.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: My naked Puts in EW have now expired.